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The Military-Industrial Complex

In The Federal Budget and GDP and The Canary and the Colly Bird I said I’d take a flashlight, calculator and canary to investigate the “Military-industrial mine-shaft that keeps us in a ruinously costly perpetual state of war”. There’s a lot of camouflage but my flashlight shed some light on the business results of what I’ll call Military Operations Inc (MOI). The canary was distressed at times but it’s OK now, maybe because I didn’t yet take it very deep.

What I mean by camouflage in this context is none of the numbers I found so far can entirely be trusted. As the Congressional GAO repeatedly says: “serious financial management problems at the Department of Defense make its financial statements unauditable.” Nonetheless, the following numbers are sufficiently OK to show relative sizes. To set them in context, DOD spending is 20% or more and DOD plus non-DOD military spending 30% or more of federal spending, i.e., around half of total estimated Federal tax revenues. Military spending grew 9% annually since 2000, much faster than GDP, and now accounts for 5%-8% of GDP.

Our stated military spending, which exceeds the next 20 nations combined, is actually a lot higher than the $711B for 2011 shown below. That number is said to include War on Terror spending but I doubt all those costs are included. Additional spending on defense-related programs, e.g., Veterans Affairs, Homeland Security, and nuclear weapons maintenance brings the total above $1T and even to $1.4T with interest on debt incurred in past wars. We have military bases in at least 150 countries, almost 1.5M active military personnel, an additional 100K DOD personnel and substantially more than 100K contractor personnel in Iraq and Afghanistan.

Spending dropped after the collapse of the Soviet Union but greatly increased following the 2001 terrorist attack that killed 3,000 US civilians. The canary was distressed to learn that the War on Terror response to that attack, recast by the Obama administration as Overseas Contingency Operation, has so far resulted in over 6,500 US military personnel killed and 50,000 wounded. The bird may not have recovered if I’d been able to find dependable counts of Iraqis, Afghanis and others killed and wounded.

Although the canary sees ratios, it is fundamentally innumerate. It recovered while I returned to my calculator. The numbers in the chart below are understated, as noted above, but they do correctly illustrate the spending pattern. A 2011 Congressional report estimates the total cost of the Iraq and Afghanistan wars will be $1.8 trillion. An academic report the same year that includes other areas of related spending estimates $5.4 trillion.

The canary showed new signs of distress when I examined the spending rationale. When President Bush declared war on terror he said it “will not end until every terrorist group of global reach has been found, stopped and defeated.” The canary was troubled because:

Such a war can never end

The justification for the first big operation was false – satellite images said to be of Iraqi factories for enriching uranium were not

That operation was followed by ones the public barely questioned in Afghanistan, the Philippines, Somalia, Trans Saharan Africa, Pakistan and Yemen

We are repeatedly told to be prepared for future actions against North Korea and Iran

The canary recovered while I looked at more numbers. We can’t know for sure where the money goes, but the next chart gives a sense of the breakdown. Pay and housing for military personnel fluctuates fairly closely around $100B. Spending on weapons and procurement increased steeply during the Vietnam War, again toward the end of the Cold War and again from the start of the War on Terror. Spending on war operations, in other words MOI’s revenue from conducting war, which also grew during the Vietnam War and Cold War escalation, increased dramatically in the past decade.

Defense R&D spending remains relatively consistent. I’ll come back to this another day because it yields some civilian benefits, e.g., the Internet. Most of the $700B to $1T we spend on defense is simply a burden on income tax payers, a tax whose only rationale is to prevent the possible occurrence of negative things.

What, then, have I learned on Day 1 of this exploration? MOI’s Overseas Contingency Operation (OCO) product line is yielding greatly increased revenues. The obvious next question is the OCO product line’s longer term potential in the “negative things” market. How much further can OCO revenues be grown and for how long? To approach answers, I will next explore OCO product strategy in the context of MOI’s overall business strategy and organizational structure. I’ll carefully watch the canary for signs of distress.

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4 comments on “The Military-Industrial Complex”

I cast this as observations by a management consultant in a coal mine with a toxic-gas-alarm canary because looking at familiar things from a different perspective and using an absurdist lens can help to dispel the fog of preconceptions.

It is especially important to avoid preconceptions about Defense because it is so inherently destructive. The theory of Defense is that by causing death and destruction we can avert worse damage, especially to our own nation. The danger is obvious. We may do more harm than good.

“I learned an important lesson 29 years ago – a financial model shows which parts of a business plan must be changed. I’d joined a computer manufacturer as VP Engineering. Its first product was in the market but only three months’ cash was left, the next gen. hardware was urgently needed because the first was too slow, and the market required major new software. I made a plan, synched it with updates by the VPs of Sales and Manufacturing, the CFO updated our financial model and we began pitching investors. That’s when I learned the best of them could see the killer flaws within 60 seconds.

“You’ll be out of cash if the next gen hardware isn’t ready 6 months earlier.” “Your OEM guys have to sell twice as many per.” “Manufacturing cost has to drop much faster with volume.” Back at the ranch I said I couldn’t get new hardware developed faster, Tom said he couldn’t get his folks to sell twice as fast, Ron said he couldn’t manufacture systems cheaper, and the CFO said, “You must find a way.” He was right. We didn’t like it but we now knew what must change.

In my post, “Let’s Not Invade Iran”, I said that for practical and moral reasons we must stop invading other countries. Not only is it counter-productive, it also costs more than we can afford. In this post we return to economics, the subject of my April 20, 2011 post, “Defense”. The chart [omitted here] shows our average annual DOD spend since 1948, in inflation adjusted dollars – about $440B. It was around $550B at the height of Vietnam and Iraq-1 and is now on a fast climb approaching $750B. That is far more than we can afford. […]

A financial model shows the trend for each line item, defense spending in this case, and the ratio among line items. […] This one [in the original post] from the Heritage Foundation shows the 45-year trend of our defense spend as a % of GDP. I’m including it because it’s a good example of looking at the wrong thing. The cost of protecting a nation has little to do with the market value of what it sells. Population size, land mass, number and size of neighboring countries are at least equally relevant. Our spend is gigantically out of proportion to all threats we face or can realistically imagine.

A student of human behavior would say our huge military spending does not reduce threats against us but provokes aggression. A financial planner would say that’s debatable but irrelevant because what we’re spending is simply unaffordable.

I stayed with that business 18 months, it raised more financing, then a year or two later was declared dead. The two-part lesson from its demise is (A) not all plans can be executed and (B) the assumptions behind not all plans make sense. If the assumptions don’t make sense it’s not worth trying to execute the plan.